Question

Extracts of the Statement of Comprehensive Income for the year ended 31 December 2018 and
the Statement of Financial Position as at 31 December 2018 are given below for two companies
viz. Amazon Limited and Gibson

Extract of the Statement of Comprehensive Income for the year ended 31 December 2018:

	Amazon Limited               R	Gibson Limited            R
Sales	6 600 000	2 160 000
Cost of Sales	4 620 000	864 000
Gross profit	1 980 000	1 296 000
Depreciation	270 000	12 000
Other expenses	240 000	45 000
Operating profit	1 470 000	1 239 000
Interest on loan	174 000	75 000
Profit before tax	1 296 000	1 164 000
Income tax	388 800	349 200
Profit after tax	907 200	814 800

Extract of the Statement of Financial Position as at 31 December 2018:

	Amazon Limited               R	Gibson Limited            R
Assets
Non-current assets	1 980 000	1 260 000
Inventories	695 000	190 000
Accounts receivable	1 000 000	180 000
Bank	0	20 000
	3 675 000	1 650 000
Equity and Liabilities
Ordinary share capital	2 000 000	1 000 000
Retained earnings	250 000	80 000
Non-current liabilities (18% p.a)	1 020 000	480 000
Accounts payable	360 000	90 000
Bank overdraft	45 000	0
	3 675 000	1 650 000

Additional Information:                                                                                                           

• Inventories as at 31 December 2017 are as follows:                                                

Amazon Limited          R800 000                                                                                           

Gibson Limited            R230 000                                                                               

• All sales and purchases of inventories are on credit.

Required:

Compare the performance of Amazon Limited and Gibson Limited (both in same industry) with regard to the following ratios and in each case state your observations:

4.1.      The ability of each company to repay its short term debts without relying on sale of its inventories.                                                                                                                                    (6)

4.2.      The return earned by shareholders on their investment.                                                       (6)

4.3.      The operational effectiveness of each company before considering interest income, interest expense and income tax.                                                                                                          (6)

4.4.      The effectiveness with which the goods for sale have been managed.                                (6)

4.5.      An evaluation of each company’s performance with regard to the management of its trade creditors.

Answer 1

Ans :
Company to repay its short term debts without relying on sale of its inventories has to find their Liquid ratio , so we will do Acid Test Ratio Test in both companies'
		Amazon	Gibson
Current Assets include-
Account Receivables	1,000,000.00	180,000.00
Bank		-	20,000.00
Liquid Assets	1,000,000.00	200,000.00
Current Liabilities
Account Payables	360,000.00	90,000.00
Bank Overdraft	45,000.00	-
		405,000.00	90,000.00
Acid Test		Liquid Assets/ Current Liabilities
Acid Test Ratio	2.47	2.22
Ans -2	Return On Investment
		Amazon	Gibson
Net profit after tax	907,200.00	814,800.00
Equity Share Capital	2,000,000.00	1,000,000.00
ROI		NPAT/Equity *100
Ratio		45.36	81.48
Ans- 3 Earnings Before Interest & Tax
		Amazon	Gibson
Operating Profits	1,470,000.00	1,239,000.00
Sales		6,600,000.00	2,160,000.00
Ratio of Operating Effectivness		Operating Profits/Sales*100
(%age)		22.27	57.36